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Who benefits most from tax cut plans from Whitmer, Michigan Republicans?

tax forms
Republican lawmakers and Gov. Gretchen Whitmer have three separate tax-cut proposals in Lansing. Republicans’ proposals would provide broader relief, while Whitmer’s proposal is targeted at the working poor and pensioners. (Shutterstock)

LANSING — It’s tax cut season in Lansing, as Democratic Gov. Gretchen Whitmer and the Republican-led Legislature negotiate plans to give money back to Michiganders amid a $14 billion surge of federal stimulus and state surplus funds.

Whitmer said she wants to make “our tax code more fair” with a $757 million plan to reverse parts of a 2011 overhaul that shifted the tax burden from businesses to individuals. She wants to repeal the so-called pension tax and expand the Earned Income Tax Credit for the working poor.

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Senate Republicans have approved a $2.6 billion tax cut plan that would pair a personal income tax cut with another major reduction in the Corporate Income Tax, calling it a "historic" proposal to help families and businesses.

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House Republicans this month ditched the business tax break with their own $1.7 billion plan to cut the personal income tax rate and increase exemptions for seniors, touting it as a way for “everyone to get relief” in the midst of high inflation nationwide. 

Why not just cut everyone a check?

It’s not that simple. 

Congress designed the American Rescue Plan Act to help state and local governments recover from the COVID-19 pandemic. In fact, lawmakers included a provision in the law to prohibit states from using their federal stimulus funds to pay for tax cuts. 

Some states are challenging that restriction in court, but as those suits play out, the Whitmer administration is aiming to comply with the federal rules to ensure the state is not forced to return any stimulus funds to Washington D.C.

The governor’s proposal, which is the most modest of the bunch, would not run afoul of the federal law because it would be entirely paid for by projected growth in state revenue, state Budget Director Chris Harkins told Bridge Michigan. 

Larger tax cut plans from Republican lawmakers could require future spending reductions because the permanent cuts would last long beyond any one-time surplus. 

House Republicans acknowledge their proposal could force the state to trim annual spending by more than $1 billion. 

But that should be a manageable cut, they said, noting the state budget grew from $58 billion in 2019 to $63 billion in 2021 and then ballooned to $72 billion this year amid the flood of federal funding. 

Whitmer is unlikely to sign tax cut bills that would force spending cuts, especially if Republican legislators do not first identify those cuts. But “there's always room for negotiation,” she said earlier this month. 

All sides hope for a deal by summer during this election year. 

Here is a look at the three major tax cut plans that will form the basis of those negotiations.

Whitmer’s plan: $757 million in tax cuts

  1. Repeal the ‘pension tax': Whitmer's plan would gradually reverse tax changes on certain forms of retirement income made in 2011 under then-Gov. Rick Snyder. 

By 2025, the state would again exempt all public pension income from taxation. Filers could also deduct up to $56,961 (individual) or $113,922 (couples) in other retirement income, including private-sector pensions, withdrawals from individual retirement accounts (IRAs) and the portion of a 401k account that is subject to an employer match. 

Taxpayers aged 67 and older would have the option to either deduct retirement income or utilize current exemptions ($20,000 for an individual or $40,000 for joint filers) on all income. 

Social Security income is not taxed in Michigan.

Projected tax cut: $495 million

Who would benefit: Anyone with a pension or other retirement income who was born after 1946 (older Michiganders were not impacted by 2011 tax code changes).

The Whitmer administration estimates nearly 500,000 households would save an average of more than $1,000 per year. And they project that 95 percent of filers with retirement income would avoid any taxation. 

A 69-year-old couple with $40,000 in pension income and a $20,000 traditional IRA withdrawal would pay no tax, regardless of any additional income from Social Security, saving about $850.

  1. Restore the Earned Income Tax Credit: Whitmer wants to raise the state-level Earned Income Tax Credit for low- and middle-income workers from 6 percent to 20 percent of the federal level, reversing another 2011 cut. 

Projected tax cut: $262 million

Who would benefit: Michiganders who have jobs but don't make a ton of money. A married couple with two kids and $40,000 in combined income would see their credit increase by roughly $400, for instance.

The credit is larger for the lowest earners, and higher earners cannot qualify. In 2021, the maximum income allowed under federal rules was $51,464 for a couple with three or more children, or $21,430 for an individual with no kids.

Whitmer's plan would increase the maximum state-level credit from $359 in 2021 to $1,233 in tax year 2022, according to the state Budget Office. The average credit would increase by about $300. All told, an estimated 738,400 households (with 985,300 children) would benefit from the proposed change.

Senate Republican plan: $2.6 billion in tax cuts

  1. Income tax rate reduction: The Senate plan would lower Michigan’s individual income tax rate from 4.25 percent to 3.9 percent. That would fulfill a promise from 2007, when then-Gov. Jennifer Granholm and lawmakers raised the rate to 4.35 percent but pledged to roll the rate back over several years. That promise was undone in 2011 by then-Gov. Rick Snyder, who persuaded lawmakers to freeze the rate at the current 4.25 percent.

Projected tax cut: $1.1 billion

Who would benefit: Almost everyone who pays taxes, nearly 4 million filers. But because the state has a flat rate, wealthier residents would get the largest dollar-over-dollar benefit. 

A family of four with an income of $63,829 — the median for Michigan in 2020 — would save $153 next year. 

A family of four with $200,000 in earnings — which would put it in the top 5 percent of earners — would save $630.

A tax rate cut would not benefit the poorest of the poor in Michigan who do not earn enough to owe taxes after exemptions, deductions and credits. In 2019, more than 1 million filers earned less than $18,000 and collectively did not owe any income tax. 

  1. Corporate tax cut: The Senate plan would cut the state’s Corporate Income Tax from 6 percent to 3.9 percent.

Projected tax cut: $490 million

Who would benefit: About 43,000 Michigan businesses that are required or have chosen to file federal taxes as a corporation, typically larger firms. Many small businesses are already exempt from Michigan’s Corporate Income Tax, and their owners instead pay personal income taxes on profits. Michigan businesses paid a collective $1.14 billion in corporate income taxes on roughly $19 billion in profits during the 2019 tax year. Under the Senate plan, they would have paid $744 million in tax. 

  1. Senior exemption: The Senate plan would increase a current tax break for seniors by allowing anyone who is at least 67 years old to exempt the first $30,000 (individual) or $60,000 (couples) of any income source from state taxation, up from the current exemption of $20,000 or $40,000.

Projected tax cut: Up to $240.6 million

Who would benefit: An individual who is 67 years or older and has more than $30,000 in income, or a senior couple with more than $60,000 in income, including about 470,000 tax filers who were not already fully exempt from paying taxes on pension income.

A senior couple with $40,000 in 401K or pension income and a $35,000 IRA withdrawal would save about $780 under the 3.9 percent personal income tax rate also proposed by Republicans.

  1. Child tax credit: The Senate plan would create a new nonrefundable tax credit of $500 per child or other dependents under the age of 19. 

Projected tax cut: Up to $800 million

Who would benefit: Any taxpayers with dependent children under the age of 19. As many as 1.5 million credits could be issued to Michigan families, according to fiscal agency estimates. Because it is non-refundable, the tax credits would not benefit the poorest of the poor in Michigan, typically those who earn $18,000 or less and are not required to pay income taxes because of existing exemptions and deductions.

House Republican plan: $1.7 billion in tax cuts 

  1. Income tax rate reduction: Like the Senate, the House plan would lower Michigan’s individual income tax rate from 4.25 percent to 3.9 percent. 

Projected tax cut: $1.1 billion

Who would benefit: Again, almost everyone who pays taxes, nearly 4 million Michigan tax filers. But because the state has a flat rate, wealthier residents would get the largest dollar-over-dollar benefit. 

A family of four with an income of $63,829 — the median for Michigan in 2020 — would save $153 next year. 

A family of four with $200,000 in earnings — which would put it in the top 5 percent of earners — would save $630.

A tax rate cut would not benefit the poorest of the poor in Michigan who do not earn enough to owe taxes after exemptions, deductions and credits. In 2019, more than 1 million filers earned less than $18,000 and collectively did not owe any income tax. 

  1. Senior income exemption: The proposal would allow any residents 62 or older to exempt the first $20,000 (individual filers) or $40,000 of all income sources from state taxation, expanding a tax break currently allowed for those 67 and older. Additionally, filers over the age of 62 could exempt another $20,000 or $40,000 in retirement-specific income, including income from Social Security payments, pensions and 401k funds.

Projected tax cut: $561 million

Who would benefit: Nonpartisan analysts project roughly 275,000 Michiganders between the ages of 62 and 67 would qualify for new income tax breaks. That's not an exact figure because Michigan does not actually require filers to list their date of birth on income tax forms. 

About 471,600 Michiganders who are already at least 67 years old and qualify for an existing income exemption could see that exemption double, allowing joint filers to exempt up to $80,000 in income before paying any tax.

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